Farmers are out of the woods – at least for a year

Earlier this year, most farmers had quite a shock when
they’ve heard that National Treasury, through the draft Taxation Laws Amendment
Bill, 2014, proposed to remove the zero-rating for VAT purposes that they
receive when they buy goods that are consumed for agricultural purposes. A
simple showing of a VAT 103 certificate, indicating that the farmer qualifies
for the zero-rating was all it took to ensure that the goods are received
at selling price less 14 per cent VAT.

Stiaan Klue, Chief Executive of the South African Institute
of Tax Professionals explains that this concession was initially introduced to
provide cash-flow relief to the agricultural sector. ‘Typical goods that
currently qualify for this zero-rating include animal feeds and medicines, fertilizers
and pesticides as well as seeds and plants’ Klue explains.

Klue, however, points out that is important to note that the
zero-rating of the supply is only allowed if the farmer physically uses the
goods for his own agricultural purposes and not for resale. Should a farmer
request a supplier to zero-rate the supply even though the farmer have ceased
to carry on his farming operations or if the farmer wants to resell the goods,
then the VAT Act allows for SARS to cancel such person’s authorisation with
immediate effect.

Klue explains that the proposal had an effective date of 1
April 2015 and was implemented due to the misuse of the system. He points to the following example contained
in the Draft Explanatory Memorandum on
the Taxation Laws Amendment Bill, 2014 to explain the fraud:

‘Vendor A acquires goods from Vendor B at the zero rate, as Vendor A is
in possession of a VAT103 (Notice of Registration) with the endorsement that it
is entitled to acquire goods listed in Part A to Schedule 2 at the zero rate,
in terms of section 11(1)(g).

Vendor A sells the same goods back to Vendor B at a lower rate per ton
per commodity whilst charging VAT at the standard rate of 14%. This resulted in
the refund to Vendor B and the refund is shared in proportions with Vendor A.

In addition to the above, Vendor B (in possession of a VAT103 that does
not have an endorsement to acquire goods at the zero rate) would place huge
orders at one of its suppliers, Vendor C, to supply goods at the zero rate to
Vendor A. Vendor B would then, before the transaction is passed in the accounts
of Vendor C, cancel the order but would request Vendor C to provide the
paperwork and agreed to pay the penalty as set out in the penalty clause in the
contract. Vendor B would continue with the transaction as if the original order
for the commodities were never cancelled. Vendor A would in turn, generate
paperwork supporting the sale of the said commodities back to Vendor B at the
lower rate per ton per commodity, but charging VAT at the standard rate of
14%.’

‘The farming community found itself in the 80/20 principle where
80 per cent of the farmers had to suffer as a result of the fraud committed by
the other 20 per cent’ Klue states. Klue, however, believes that although the fiscus stood to lose with the current
zero-rating, it was the responsibility of SAIT and industry to take this matter
up with SARS as the net result of the proposal would have been that the
farmer’s cash flow may have been severely affected. ‘The proposal would have
led to farmers only being able to claim the VAT paid on the 14 per cent
VAT-inclusive price upon the submission of a return, which for most farmers
only take place once every six months.

In this regard, SAIT and
AgriSA made submissions to National Treasury calling for the proposal to be
scrapped and for Treasury and SARS to consider other more effective forms of
enforcement. Both bodies also made presentations to the Standing Committee on
Finance on this matter on the 26th of August 2014.

National Treasury acted
favourably on SAIT’s proposal and stipulated that the repeal of the provision for zero-rating of certain agricultural
inputs will be postponed for at least a year to allow SARS and the National
Treasury together with the Department of Agriculture to do further analysis on the
impact of these amendments and to undertake additional consultations. Treasury
conceded that this postponement will also provide farmers sufficient time to
prepare for the repeal.

Klue believes that further participation would be of paramount
importance in ensuring that the most efficient possible solution can be found.
‘Legislation cannot be promulgated without public participation and one must
commend National Treasury for being considerate in this regard’ Klue states.

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.